For the second quarter as of June 15, the Russell 2000 Index, a measure of US small cap stocks, has performed higher than the Russell 1000 Index, a measure of US large cap stocks. However, the Russell 2000 Index has fallen by 9% since the completion of the last Russell Indexes reconstitution on Friday, June 26, 2015.

Steven DeSanctis, SMID Cap Strategist at Jefferies & Company:
“While the underperformance of US small caps relative to large caps in the past year has narrowed the valuation gap between the two, US equity markets in general still appear stretched from a valuation standpoint. And while a number of signs of US economic improvement have helped small cap stocks to a certain extent in recent months, we continue to see downward earnings pressure. Looking ahead, in my view, volatility in small caps may continue as a result of global uncertainty from Brexit, to the Fed and interest rates to the US presidential election cycle.”

Market participants are focused on the Russell indexes in the coming weeks, as FTSE Russell prepares for its annual Russell US indexes reconstitution. At reconstitution, the entire Russell family of global indexes, including the Russell 1000 Index and Russell 2000 Index, are rebalanced to ensure that the indexes continue to accurately reflect the market.

Expected index changes at this year reflect a shrinking US equity market. The breakpoint between the Russell 1000 and 2000 Indexes is expected to decrease to $2.9 billion, down 15% from last year, the smallest small cap stock is expected to be 25% smaller at a $132.9 million market capitalization and the largest small cap stock is expected to have a $3.9 billion market capitalization (above the breakpoint due to banding), 9% smaller than last year’s biggest small cap.

As part of reconstitution, which concludes at US market close on Friday, June 24, composition, ranges and breakpoints between US large and small-cap stocks will be adjusted to reflect the current market environment.

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